Only a handful of states allow a foreign tax credit. Arizona, Indiana, and North Carolina offer a broad credit for income taxes paid to any foreign country, modeled on the federal version. Massachusetts, Michigan, and New York offer a narrower credit that covers taxes paid to Canada or a Canadian province but no other country. The remaining income-taxing states offer no credit at all, and nine states with no individual income tax make the question moot.
States With a General Foreign Tax Credit
Three states let residents claim a nonrefundable credit for income taxes paid to any foreign country. The credit is capped at the portion of state tax attributable to the foreign income, so it never wipes out tax on domestic earnings.
Arizona
Arizona allows a credit for net income taxes paid to another country, provided those taxes would qualify for the federal credit under Internal Revenue Code Sections 901 and 903. You claim it on Form 309, Credit for Taxes Paid to Another State or Country, and also complete Form 301, Nonrefundable Individual Tax Credits and Recapture. Arizona requires Form 309 even if you weren’t required to file the federal Form 1116.1Arizona Department of Revenue. Arizona Form 309 – Credit for Taxes Paid to Another State or Country
One catch matters a lot. Arizona does not allow any carryforward or carryback of unused foreign tax credits. If the credit is larger than the Arizona tax on your foreign income in the year you paid the foreign tax, the excess is lost.2Arizona Department of Revenue. Arizona Form 309 – Credit for Taxes Paid to Another State or Country
Indiana
Indiana offers a foreign tax credit for residents who claimed the credit for foreign taxes on their federal return. The computation mirrors Indiana’s credit for taxes paid to another state. You claim it on Schedule CR and must attach a copy of the federal Form 1116 to your Indiana adjusted gross income tax return.
North Carolina
North Carolina residents can claim a credit for income taxes paid to a foreign country on income that is also subject to North Carolina tax. You calculate it on Form D-400TC, Individual Income Tax Credits, under Part 1. The form must be attached to your return or the credit will be disallowed.3North Carolina Department of Revenue. 2025 Individual Income Tax Credits D-400TC
States That Cover Only Canadian Taxes
A separate group allows a foreign tax credit only for taxes paid to Canada or a Canadian province. If you paid income tax to the United Kingdom, Germany, Japan, or any country other than Canada, these states offer no relief at the state level.
Massachusetts is the clearest example. The state explicitly allows a credit for income taxes paid to Canada or any Canadian province and disallows the credit for taxes paid to any other foreign country. If you qualify, you must first reduce the Canadian tax by the amount you were entitled to claim as a federal Foreign Tax Credit on Form 1116, whether or not you actually claimed it. The Massachusetts credit applies only to the portion the federal credit did not already cover.4Massachusetts.gov. Learn About the Income Tax Paid to Another Jurisdiction Credit
Michigan and New York have similar provisions that extend their credit for taxes paid to another state to include Canadian taxes while excluding other foreign countries. Specifics vary, so residents of those states should check the state’s own credit instructions before filing.
States With No Individual Income Tax
If your state doesn’t tax your income, there is no double taxation for a credit to fix. Nine states impose no broad-based individual income tax:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
New Hampshire previously taxed interest and dividend income but repealed that tax effective 2025. Tennessee eliminated its tax on investment income in 2021. Washington does not tax earned income but does impose a separate capital gains tax on certain high earners, which can matter if you have foreign-source investment gains.
Income-Tax States That Offer No Foreign Credit
The majority of states that levy an income tax offer no credit for taxes paid to a foreign country. California, Illinois, Kentucky, Ohio, Alabama, Connecticut, Maryland, and New Jersey are on that list, along with most others. California’s position is typical: residents owe state tax on income from all sources regardless of where it was earned.5State of California Franchise Tax Board. FTB Pub. 1100 – Taxation of Nonresidents and Individuals Who Change Residency
Most of these states start from federal adjusted gross income, which already includes foreign-sourced earnings. They conform to the federal income definitions but decouple from the federal credit structure. Residents earning income abroad end up paying the foreign tax, the federal tax (partially offset by the federal credit), and the full state tax with no offset for what went to the foreign government.
How the Credit Is Calculated Where It Exists
The states that allow the credit use a similar limiting formula. The credit equals the lesser of the foreign income tax you actually paid or a limiting fraction applied to your state tax liability.
The fraction is your foreign-sourced income included in the state tax base divided by your total state taxable income. Multiply that fraction by your total state tax, and the result is the ceiling on the credit.
Say your foreign income is $40,000 out of $200,000 in total state taxable income. The fraction is 20%. If your state tax bill is $8,000, the maximum credit is $1,600 regardless of whether you paid $3,000 in foreign taxes. Arizona’s Form 309 and North Carolina’s Form D-400TC walk through the calculation step by step.1Arizona Department of Revenue. Arizona Form 309 – Credit for Taxes Paid to Another State or Country Indiana requires you to attach the federal Form 1116, which both proves the taxes were creditable at the federal level and supplies the foreign income figures needed for the state calculation.
Documentation and Carryforward
Documentation is where residents most often lose the credit. Keep your foreign tax return (with a certified translation if it is not in English), any withholding receipts or payment confirmations from the foreign government, and your federal Form 1116 if you filed one. States that allow the credit will disallow it if you cannot substantiate the amount paid.
If you qualified for the federal simplified election because your creditable foreign taxes were $300 or less ($600 on a joint return) from passive income, check whether your state accepts that election in place of a full Form 1116 filing. Arizona, for example, requires its own Form 309 regardless of what you did federally.1Arizona Department of Revenue. Arizona Form 309 – Credit for Taxes Paid to Another State or Country
Carryforward rules matter when your foreign taxes exceed the state’s limit. Federal unused foreign tax credits can generally be carried forward up to ten years. State treatment is less generous. Arizona flatly prohibits any carryforward or carryback of its foreign tax credit.2Arizona Department of Revenue. Arizona Form 309 – Credit for Taxes Paid to Another State or Country Other states set their own rules, so confirm before assuming excess credit can be used in a later year.
For residents of states with no foreign tax credit, the federal credit on Form 1116 is the only relief available. It will not touch the state bill, but making full use of it reduces the overall tax on your foreign income.